Greener Than Thou

When the economics of residential solar panels are up for discussion, the phrase “grid parity”—meaning the point at which solar-generated electricity is as cheap as the energy the local utility supplies—can quickly dampen enthusiasm. Though installed costs are dropping, critics say upfront expenses and extended payback periods still stand in the way of broader adoption. However, economists are finding photovoltaic panels may provide a self-esteem boost, with its own economic worth, especially in areas where keeping up with the Joneses is more likely to include compost piles than a new Cadillac.

That isn’t to say automobiles don’t fit into this equation. In fact, one particular auto—Toyota’s Prius—has become a frequently cited model for the way environmentally minded consumers are inspiring envy by going green. While other automakers have camouflaged their hybrid technology by changing out the mechanics of pre-existing models, Toyota gave the Prius a highly recognizable design, so both the car and its driver stand out in the crowd.

Researchers Alison and Steve Sexton, twins both pursuing Ph.D.s in economics, use the phrase “conspicuous conservationists” to describe environmentally minded consumers whose altruistic behavior may be motivated as much by a desire for status as it is by their desire to do good. Theirs is the most recent in a spate of research linking willingness to pay more for items seen as more environmentally friendly—and the key word is “seen.”

The idea is based on an economic theory called “signaling.” Think about the effect high-end logos can have on the sales of clothing. All those alligators and polo ponies can symbolize status in the minds of both wearers and observers. Additionally, in country club settings and high-end ZIP codes, those logos can indicate membership in a group. Similarly, the Sextons found, the Prius—its distinctive hatchback design—seems to be a visual signal of green-ness, which is particularly valued in areas where environmental sensitivity runs high. As it turns out, Prius owners in those areas tend to run in packs, and they’re willing to pay for that privilege.

The folks at “Freakonomics Radio,” a show produced by American Public Media and WNYC, hosted the Sextons last summer to discuss these findings. The economic duo compared the easily spotted Prius to Honda’s Civic hybrid, which is almost impossible to distinguish from the standard model without looking under the hood.

“We’re able to basically trace out a demand curve and estimate the willingness to pay for that single attribute of the Prius,” Steve Sexton said, discussing that vehicle’s signature outline. “That is, how much people are willing to pay just to signal that they are green.”

The Sextons focused on the states of Colorado and Washington, using voting records in those two areas to understand how progressive different ZIP codes were, and then studied vehicle registration records for those areas. While there was no statistical difference across those regions in the ownership rates of easily overlooked hybrid Civics, the proportion of Priuses soared in more environmentally active regions. The Sextons crunched the numbers and concluded the visible identifiability of the Prius was worth between $1,000 and $4,000 in Colorado and between $500 and $1,300 in Washington.

This “Prius effect” appears to carry over, in some areas, to rooftop PV panels. Economist Samuel Dastrup, now a research fellow at New York University’s Furman Center for Real Estate and Urban Economics, worked with a team that included researchers from the University of California, Los Angeles, and the National Bureau of Economic Research. The group focused on neighborhoods in San Diego and Sacramento.

“These are two of the highest penetration rates for solar in the U.S.,” he said.

For solar-positive contractors, the takeaway from this group’s effort might boil down to “follow that Prius.” In general, they found solar panels add 3.6 percent to the sales price of homes in the studied regions, but two factors—an area’s rate of college-level or higher education and its percentage of Prius owners—were significantly related to higher returns from solar-panel investments, according to sales records.

As a comparison, Dastrup’s team also looked at resale rates of solar-topped homes in areas where truck-registration predominated. Not surprisingly, perhaps, the resale premium fell for such homes in those areas.

“What our numbers show is that you wouldn’t be justified telling people they can expect the same increase in price with panels in terms of resale on your home values,” Dastrup said.

The collapse in home prices that was occurring during the investigation complicated Dastrup’s research.

“The fluctuations in the housing market did make it tricky,” he said, but the group took care to adjust for such variations. However, the team wasn’t able to draw any definitive conclusions as to why Prius and PV panels ownership seem correlated, whether, in Dastrup’s words, these investments represent an “I’m greener than thou” motivation or “I have a passion, and I’m willing to spend money” to support an ideal.

The importance of visibility to increased PV adoption also remains an unknown variable. As Sexton noted during the “Freakonomics” program, boosting a home’s insulation and thoroughly sealing all wall openings are the most cost--effective efficiency improvements a homeowner can make, but are Prius-ville homeowners more interested in showing off rooftop panels than in raising the R-values inside their walls?

“I think there’s an interesting question of value there,” said Ashley Nicholls, a brand manager with Kelliher Samets Volk (KSV), a Burlington, Vt.-based advertising and marketing agency with offices in New York City and Boston. “You’re adopting that as part of your own personal brand, as, ‘I am the person who can afford to make these kinds of choices.’”

KSV frequently helps electric utilities market energy--efficiency programs—such as the rebate efforts that encourage customers to get home energy audits and upgrade their homes’ insulation. Nicholls equates the Prius-and-panel owners to a concept KSV calls “passionate networks of believers.”

“Our approach is that the target market is dead,” she said, describing the traditional advertising approach of reaching out to a specific demographic, such as women older than 35 years or 18- to 30-year-old men. Instead, they take a social-networking approach that reaches across traditional demographic lines to create multiple lines to a single interest—e.g., energy efficiency or reducing greenhouse gas emissions—because, Nicholls said, “exciting your fans is the best way for that network to grow.

While Nicholls is skeptical that contractors seeking to grow their solar-installation business could gain much traction by simply stalking Prius owners, she sees value in visibly promoting homeowners’ efficiency upgrades. One possible marketing tactic involves open-house days, which allow homeowners to explain the process and benefits of their efficiency upgrades to others considering such investments.

“It’s a great business development moment for the contractor and a moment of pride for the homeowner,” she said. “I think you could take that same moment and apply it to a solar panel.”